Publication 925 (2023): Passive Activity and At-Risk Rules

This IRS publication explains two sets of rules that may limit deductions for losses from business activities, rentals, and other income-producing ventures: passive activity and at-risk rules.

What is Publication 925?

Publication 925, issued annually by the Internal Revenue Service (IRS), is a resource for taxpayers to understand the Passive Activity and At-Risk Rules. These rules can limit the amount of deductible losses you can claim from certain activities on your tax return.

What's the Purpose of Publication 925?

Publication 925 helps taxpayers understand how the passive activity and at-risk rules might affect their ability to deduct losses from certain activities on their tax return.

Key Points covered in Publication 925:

A. Apply at-risk rules first: Before applying the passive activity rules, you must use the at-risk rules to determine your allowable loss deduction.

B. Passive activity rules: These rules generally limit deductions for losses from passive activities unless you materially participate in the activity or meet specific exceptions, such as real estate with certain ownership and participation levels.

C. Material participation: This involves actively and regularly making significant and crucial decisions in the operation of the activity.

D. At-risk rules: These rules limit your deductible loss to the amount of your personal financial investment at risk in the activity. Any borrowed money used is not considered at risk unless you have personal liability for repayment.

Benefits of Understanding Publication 925

A. Accurate tax filing: Knowing how these rules apply can help you accurately report your income and deductions on your tax return, potentially reducing your tax liability.

B. Avoiding tax errors: Understanding these rules can prevent you from claiming deductions that the IRS may disallow, potentially leading to penalties and interest charges.

C. Informed financial decisions: Knowledge of these rules can help you make informed decisions about your investments and business activities by considering the potential tax implications.

For the current year's Publication 925, click here.